Section 2703 Buy Sell Agreement

In the event of a triggering event, the purchase/sale contract will make certain requirements or options available to the company or other owners (. For example, an obligation to purchase the seller`s interest or a pre-emption right) depending on the customer`s objectives. In a sense, an exit strategy is set for owners when creating the entity, which will reduce the risk of conflict in the event of a trigger event. The effects of the AMT of stock withdrawals are avoided. As noted above, one of the drawbacks of a stock withdrawal contract is the potential of AMT to obtain life insurance revenue. AMT is not a problem in cross-purchase agreements, and any insurance received is generally not taxed (unless a transfer is made for value, as described above). As part of an overall real estate planning strategy, co-owners of a portfolio close to the business should consider entering into sales contracts to determine the fair value of a business interest for inheritance tax purposes, particularly when the value is expected to exceed the lifetime exemption from inheritance tax (currently $5.45 million). Buy-sell agreements that meet the requirements of the old rules and CRI Sec 2703 can avoid costly litigation with the IRS. Purchase contracts are generally covered by one of three categories: repurchase agreements, cross-sell agreements and hybrid agreements. The general rule does not apply when certain requirements are met. Careful compliance with these requirements allows the purchase/sale contract to be used to assess the activity that is closely used for transfer tax purposes.

The general rule does not apply to options, agreements, rights or restrictions that meet all of the following requirements (Article 2703, Point b): First, the sales contract must not serve a « testamentary purpose. » Among the factors taken into account in determining whether a purchase-sale contract has a « will purpose, » only an insurance policy on the life of each shareholder is required. When insurance is used to finance the death purchase obligation, a cross-purchase contract generally requires each shareholder to have separate insurance policies on the other owner`s life. For example, if a company has six shareholders, 30 insurance policies are required. The number of policies required is calculated according to the following formula: NP – n2 `n, where « n » is the number of shareholders (30 – 6 x 6 – 6). When a share withdrawal contract is used, the company acquires a policy over the life of each shareholder, which significantly reduces insurance costs and simplifies the implementation of the agreement. However, in Lauder`s estate, the Finance Tribunal gave an overview of the application of this test. The tax court held that a buy/sell agreement was merely an instrument for reducing inheritance tax when (1) considerations of wills influenced the parties concerned and (2) the formula of the agreement did not reflect the full and reasonable consideration, since it does not set a fair price for interests.